California weighs giving away more CO2 permits

Reuters Staff

3 Min Read

SAN FRANCISCO, Aug 1 (Reuters Point Carbon) - In an effort to dissuade companies in key industries facing new carbon costs from leaving the state, California is considering giving them millions of dollars worth of additional free greenhouse gas allowances, state’s air regulator said on Monday.

California’s cap-and-trade program seeks to emulate tactics used in the European Union and Australia to address emission “leakage” - a term describing the exodus of employers from a state or country in order to sidestep environmental costs.

The California Air Resources Board (ARB), the regulator of the forthcoming program, held a workshop in Sacramento on Monday where it discussed plans to give away more free permits to prevent leakage in “trade-exposed” industries like cement production, oil refining and food processing.

Over the first three allowance auctions, which begin in November, the state will sell 48.9 million allowances and give away 53.8 million allowances, according to ARB.

Any company deemed to have either a high, medium or low risk of leaving the state will receive all the allowances they need to comply with the program during the first two-year compliance period, from 2013-2014, rather than have to buy the permits at regular auctions.

But those in the low and medium risk groups are currently scheduled to see their allotment of free allowances start to decline in 2015 by as much as half.

ARB officials on Monday said they are conducting studies examining the leakage risk of companies based on their historical energy costs and trade flows.

Any change to the regulation won’t come quickly, however. The results of the studies are not expected until late 2013 at the earliest.

“Any real shift in how things work would have to go through the entire public regulatory process as well,” said Dave Clegern, an ARB spokesman.

The changes would need to be approved by November, 2014, when the first free allocations for the second compliance period begins.

While ARB wants to avoid forcing businesses out of a state already suffering from high unemployment, it also wants to avoid overallocating the market with free permits, a common problem in cap-and-trade programs that has created to low carbon prices in Europe and the northeast U.S.

California’s first allowance auction will be held in November but precompliance trading is currently taking place in the over-the-counter market.

After climbing above $20 per tonne last week, California carbon allowances (CCAs) for delivery in 2013 cleared as low as $18.25 on the IntercontinentalExchange Tuesday morning.

CCAs have been trading for about twice as much as European Union allowances, although daily trading volumes of CCAs are much smaller.

A practice auction designed to test the program’s systems is scheduled for August 30.